Release Date: August 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- HomeCo Daily Needs REIT (ASX:HDN, Financial) maintained a high occupancy rate of over 99% since IPO.
- The company achieved sector-leading cash collections at 99% since IPO.
- Leasing spreads were consistently strong, with over 6% for the FY24 period.
- The development pipeline has grown to over $700 million, indicating future growth potential.
- The company maintained a conservative balance sheet with gearing at the midpoint of the target range.
Negative Points
- Net tangible assets (NTA) per unit saw a modest 3% reduction versus June '23.
- Higher interest expenses offset the property net income growth of 4% in FY24.
- The company had to adjust its development commencements to $85 million, below the targeted $120 million.
- There is a potential risk of income drag or loss of income from capital expenditures.
- The cost of debt is expected to be around 4.5%, which could impact future profitability.
Q & A Highlights
Q: Just on the development commencements in '24, coming out at $85 million compared to $120 million targeted at the half. Can you just talk to the difference there and whether it's around timing or cancellations?
A: Thanks, Cody. If you recall at the half, what I said was that we will always target between $100 million to $120 million a year. However, it will also be taking into account the balance sheet capacity and other opportunities in the period. So what we've done is, for the period, we've commenced slightly less developments than we were planning, but we've also bought some quality assets and restocked the development pipeline. - Sid Sharma, CEO
Q: Maybe just on the model portfolio. Sid, in the past, you've noted to get around 1% to 2% of reweighting every year through remixing. We're starting to see retail margins come off a bit, some store closures and so on. Do you think we might see that 1% to 2% pickup in '25?
A: I think there's some opportunities for that to occur, yes. - Sid Sharma, CEO
Q: Can you speak to the terms you're able to achieve there. Whether there's any change and what we should be expecting for cost of debt into '25?
A: So we increased the tenor. So, I mean that comes at a slight cost, but what we'd say is the credit margin was unchanged, and we had really strong interest. That book was over 2x covered, some big names came into the book. So it continues to reflect the high credit quality of HDN. - Will McMcking, CFO
Q: Just wondering if you expect any income drag or loss of income from the CapEx you're spending in the existing financial year or the current financial year?
A: No, Richard. The capital expenditure is all incremental. There will be very little tenant downtime or lost rent really through the period. - Sid Sharma, CEO
Q: Should we be assuming that asset sales, all other things being equal are broadly going to match the CapEx spend?
A: Yes, I think that's a fair assumption, Richard. Look, we're pretty happy with the asset recycling to date. The portfolio is in pretty good shape. We want to keep gearing about where it is. So in order to fund the development book, we'll selectively recycle an asset here or there. - Sid Sharma, CEO
Q: Any thoughts on the hedge book? Obviously, you're well covered '25, the hedges roll off '26 and I don't think there's any hedging for '27. So just interested in how you're thinking about tackling that this year.
A: Yes. I mean, we're obviously well covered for the next 18 months. And as we said, we'll be quite opportunistic. We were having this conversation around increasing the hedging at the half year with weighted that's gone in our favor, and there will be opportunities. - Will McMcking, CFO
Q: Your answer to one of the earlier questions about the debt and the increase of tenor. Your response was it came in a slight cost, but credit margin remained unchanged. Can you just elaborate on how it came in at a cost but margin was unchanged?
A: Yes. So like-for-like, our credit margin is unchanged as you add additional years to your debt tenor, that typically comes at a cost. So rule of thumb is about 10 bps per annum. So the credit margin is (inaudible). - Will McMcking, CFO
Q: Can we assume that these projects, as you kick them off over the remainder of this decade, they're all going to be [pad] sites or additional land, et cetera? Or will there be an element of impacting the existing center? I'm just trying to work out how to think about actual NOI growth going forward?
A: Good question, Simon. So that GLA in planning of $110,000 and GLA in plan in GLA approved to $40,000 is all incremental. It will have very little impact to existing assets. So that's new GLA, new income. - Sid Sharma, CEO
Q: Can you remind us of your stake in LML and whether or not you think there will be any funding requirements on HDN's part going forward if that vehicle makes further acquisitions?
A: So if you recall, HDN originally committed to a maximum of $50 million of investment into the last mile retail logistics fund, $43 million of that has already been invested and is sitting on a net gain of about 20%. The residual $7 million will be invested in the very near term as LML has unconditionally exchanged on another acquisition and will probably reach full deployment in the near term. Beyond the $50 million, there will be no further commitments at this stage. - Sid Sharma, CEO
Q: Could you point to any key contributors to that increase, please?
A: Thanks, David. page 19, two of the key contributors is the restocking of the pipeline through the acquisitions we've made at Leppington and Williams Landing. So each of these projects are north of about $50 million each and then the balance of the increase is driven through incremental opportunities identified on vacant land across the book, and the development team is doing a great job trying to find new opportunities where we can build more and lease more. - Sid Sharma, CEO
Q: Could you provide any further color on kind of how you're seeing the consumer environment and kind of demand across supermarkets versus specialty versus kind of traditional LFR?
A: So in the first half of FY24, you saw consumer sentiment reflecting pretty poor consumer spending, and you saw that in the movement in the MAT growth. But in the last half, especially as we ended June quarter, there's a fair bit of cost of goods deflation, which has led to higher volumes, higher foot traffic and higher sales across all of our categories, including supermarkets, including large format. So it feels like it's troughed and retail spending is trending in the right direction. But I'd call out that there has been cost of goods deflation. So volumes are up, foot traffic is up, but our retailers are telling us they're holding margin, which is the most important point. - Sid Sharma, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
